QR float a litmus test for IPO market

Stockbrokers busily drumming up interest in the QR National float will have to pull out all stops to convince the public that it is possible to make money on initial public offer transactions.

The joint lead managers are targeting a 30 per cent allocation of the $3 billion share offer to be taken up by retail investors, and are busy holding seminars to train retail brokers before the float’s prospectus is issued in October.

It is a challenging target given the lacklustre interest retail investors have shown in floats so far this year. There are also mixed feelings among the public towards government privatisations, which have a chequered post-float performance history.

Some privatisations, including Commonwealth Bank of Australia and the first tranche of Telstra shares, were brilliant moneyspinners for investors. On the other hand, shares in the Telstra 2 float were issued on the Australian Securities Exchange at $7.80 each and soon went into a downward spiral. Shares in the third stage of the Telstra privatisation were floated at just $3.30.

“Retail investors are very cautious because they lost a lot of money in 2007 and 2008. The ones who have relied on fund managers are still struggling to get that money back,"
Clime Investment Management
chief investment officer
John Abernethy
says.

Retail investors were badly burnt in the
Myer
float last November. The mass-marketed transaction attracted record retail participation levels as high as 50 per cent, but investors watched in horror as Myer shares slumped shortly after their debut. Almost a year later they have failed to claw back to their $3.80 offer price.

Retail investors in a big company float want to see its shares take off in the first weeks after listing to be convinced that floats are a worthwhile investment.

“If retail investors think the float is slightly underpriced they would be likely to trade it rather than buy to hold. If it is held as an open book where the retail investor has to bid blindly, sophisticated investors won’t be interested," Abernethy says.

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Perceptions of being taken for a ride, or at least being placed at a disadvantage relative to other institutional investors during a capital raising, are not helping.

A report released by advisory firm ISS Governance on the $100 billion in equity capital raised in 2008 and 2009 found that investors with “sizeable business" links to investment banks received large allocations of heavily discounted stock at the expense of retail investors and other shareholders.

Retail investors were also concerned about their holdings being diluted in share placements offered exclusively to institutional investors, the study found.

Retail investor participation in QR National is shaping up as a crucial test of the IPO market, and of public confidence in a sharemarket recovery. The QRN camp says it has received an optimistic response from overseas investors.

“I’ve just completed pre-marketing activities with major institutional investors in North America, Europe and Asia. We have received a phenomenal response from potential investors," QR National chief executive
Lance Hockridge
says.

Company floats all but ground to a halt this year amid sharemarket volatility and sentiment worsened over fears that the sovereign debt problems of some European countries would spread.

Scores of sharemarket floats, which were expected to enjoy a significant take-up by retail investors, were shelved. Many waiting in the wings are private equity-owned companies with exposure to the consumer sector, which has had a bumpy ride since the effects of government stimulus spending wore off earlier this year.

The floats of Pacific Equity Partners’ Hoyts and bookseller RED Group, CHAMP Private Equity’s Manassen Foods and Archer Capital’s Rebel Group have all been pulled due to jittery markets, but all could be quickly revived once investor sentiment rebounds.

Other floats that never made it past the starting blocks are corporate spin-offs, the most notable being Valemus, the Australian arm of German construction giant Bilfinger Berger. The $1.3 billion Valemus float was pulled in July at the eleventh hour in the middle of the institutional placement, after weak demand from investors at the bottom end of the $2.20 to $2.50 pricing range.

Fears of a double-dip recession in the United States persist, and shakiness in European markets are making it unlikely that any other billion-dollar plus float besides QR National is going to get off the ground before the end of the year.

QR National is going to be an important litmus test, not only for the viability of the IPO market but also for the willingness of retail investors to take part in capital raisings.